Lessons about Money
For founders, freelancers and people who want to improve their financial literacy
Hi, I’m Jess. Founder of skincare brand frank body and creative agency Willow & Blake. I’ve spent the last 15 years building $1billion worth of brands. Now I am getting back to my roots as a writer. MUSE MUSE is a place for me to document my thoughts on work, productivity, redefining success, abundance and building a life you love, with your values & purposes at the core of it.
Michael Da Gama Pinto and I first met about two years ago. We operate in similar circles: he was running his consumer fund, Era VC. I was running my consumer brands. A friendship was struck based on mutual respect, which if I am honest, is hard to find in the world of investing.
Mike became a trusted confidant and wise ear in a world full of what I lovingly call “snakes.” I decided to partner with him on this series because he lives and breaths the same values as me & he works with the same goals in mind: living a healthy, abundant life with plenty of time for his family, friends and personal growth. And above all, he believes in sharing his knowledge so others can do the same.
Let’s dive into it.
Part 1: The fundamentals of financial literacy for business
J: Mike, tell us about yourself so people can understand your experience.
M: My grandfather was a freedom fighter in Africa and after his brother was assassinated, my grandfather dedicated his life to fighting for justice and standing up for the little guy.
As a child my grandfather and father told me that to make change in this world you need lots of money. From then my obsession with getting money began. I wanted to be some sort of Indian Robin Hood - make money with the rich and give to the poor.
This explains all my career choices from there on.
I learnt the fundamentals at PwC for 10 years with the last four years in financial advisory and became a Chartered Accountant. I then followed the money into a Private Equity role and happened to invest in Aesop in 2009 which we sold to Natura in 2012 (who then on sold it to Loreal for $3.3bn). I didn’t make any money on either of those transactions, but I was so lucky to learn about brand from the amazing people in the business including the founder Dennis who I still count as a friend and mentor in my life.
I left the Private Equity world to take a role at Swisse Wellness as the CFO and loved the goal the team had to make millions of people around the world healthier and happier. It also had a very unique growth model at the time pioneered by Radek and an incredible culture and team. In the four years there I spent more time worrying about whether the company could pay its bills or not (a story for another day) but the last 18 months of my time there was surreal, and we ultimately sold for $1.7bn in 2015. I was very lucky to have some equity value in the company and on the day we sold, rang my father and said it’s time to honour my ancestors.
I then set up a Private Ancillary Fund and began giving money away. I read a book about effective altruism at the time and realised I’ve got to keep making more. I decided to use the learnings from Aesop and Swisse to create a playbook for growing consumer brands and over the last eight years have raised $70m to back incredible brands including Seed Health, WelleCo, Jinx, Hunter Lab, Pillar Performance and Conserving Beauty.
My father passed away five years ago and he was an educator. Every time I share knowledge I feel like I’m honouring his legacy so I really thank you for this opportunity Jess to share some of my learnings. I really respect your ability to create and communicate and thank you for your trust to let me share some insights with your community.
J: That's an amazing story. My grandfather had a similarly huge impact on me by telling em “You're worth whatever price you put on yourself.” And I relate, as the daughter of two teachers to the desire to pass on your learnings. You’re passionate about improving the financial literacy of the people around you, particularly ensuring equal access to this information for women. What are the most fundamental principles of finance you want to start with, or your top financial principles?
M: I believe we are at our best when we have economic safety as this leads to a feeling of agency and self determination. Safety is key as it allows us to feel in control. When we humans feel in control, we feel safe. When we are safe, we are more likely to feel happy.
So to me, whether you are a wage earner, or business owner it’s all about financial control (gosh I sound like Britney Spears’ dad here). I see the finance profession as very skilled at putting up barriers to people taking control. Barriers include limiting the allocation of capital to only like minded people or using unnecessary jargon to keep people out of the system.
You feel in control as a wage earner when you have enough in the bank for at least 3-6 months of expenses and have been in a role that makes you feel like you are getting a steady pay cheque that can meet your basic needs each month. For business it’s the same. If you have 3-6 months cover of expenses and good line of sight on the next quarter, you feel in control.
15 years ago my first daughter was born. 13 years ago my second daughter. 10 years ago my first son. I realised that my son is likely to have different access to opportunities and capital than my daughters and it pissed me off.
I’m keen to play a role in fairer allocation of capital and chose the consumer space as I had great experience in it and traditionally consumers have traditionally been majority women so expected our portfolio to have a high representation of female founders. My overall belief is if more female founders create equity value, they will be more likely to fairly distribute it.
The information shared here is in an attempt at jargon free communication to help increase a sense of financial control, agency and happiness for as many as possible.
J: Tell us a story that reaffirmed everything you believe about money.
M: Let me set the scene. It's 2008. I’m a private equity professional about to board my first ever private jet ride from Birmingham Alabama to New York City. I feel like I’m in the Bollywood version of the Wolf of Wall Street.
I cannot stop smiling as we across the tarmac, from the lounge area to the private jet. However, it's during this short walk that I learn that our bank lost confidence in the future prospects of our fund’s major investment (a Solar Company) and swept the cash at bank.
In seconds, the business was bankrupt.
Yes, a bank can just sweep your money. But how and why?
Cash is oxygen for a business, without it, it dies. The bank concluded, post a covenant breach as a result to changes to solar rebate legislation, that the business could not generate enough cash, nor would the investors put more money in to pay back the bank loan in enough time. The bank concluded the business was dead in the water and took the cash remaining in the company's bank accounts to repay its own loan.
Ultimately, business is always about cash - it’s your oxygen mask. Enduring businesses know how to manage their cashflow. Bad businesses rely on others for it and one day get starved of oxygen and die either by their investors or bankers.
J: Ok, so we know money is crucial to launching, growing and surviving in business. There are several ways for businesses to access cash, how would you break it down for someone?
M: There are three main ways to increase cash in your business:
· Raise money from an investor
· Borrow money from a bank
· Make profit
Raising money from investors: An investor will normally put cash into the bank account of a business and get a share certificate showing them their ownership of part of the business. How many shares they ask for and receive in a business is negotiated between the two parties. If the company fails, then the piece of paper is often all that the investor gets to keep, that and the memories. The investor, when buying shares in a company, is typically trying to price the risk of losing their money and so seek a return in line with the perceived risk they believe they are taking. The riskier they believe the venture the more shares they will want for their money and the more protective mechanisms they will put in place such as preferred share structures.
Borrowing money from banks: Most of us are familiar with a bank. Banks require security and often regular payments. Security refers to the concept that if for whatever reason you cannot pay your bank the cash you owe them, they will take something else of value from you. This can be something the business owns or something you own personally, like your house, car or other shares. The bank has limited its ability to lose its money through these guarantees, so it can afford to price its offering to you at cheaper than an investor would. The bank seeks a return on their money less than an investor because in all scenarios a bank gets paid FIRST before an investor.
In both scenarios the investor and the bank are providing money to you with an expectation that you will make your own cash in the future to pay them back.
Now the most important and cheapest form of cash is making your own profit. If you make a healthy profit consistently you will be able to increase your own cash flow and control your own destiny. Focusing on making profit can ultimately slow growth down but it does lead to a higher sense of control… and with higher sense of control. You won’t find yourself crying on the inside whilst taking your first private jet trip.
J: There are lot of protections that investors put in place to minimise their risk, often at the sacrifice of the founders, so I think this is crucial to learn about when raising capital. What advice would you give to first time founders to ensure there is equal risk mitigation on both sides?
M: Investors are never more flexible or kind when you are at term sheet stage (i.e. their first offer). Bringing a good lawyer or commercial advisor at the start is way more impactful than bringing them in at the end - a well fleshed out term sheet can save a lot of time and heartache.
Too often founders focus on valuation and their own shareholding, which is impacted by dilution. Yes, this matters, especially when things go well and you want to limit dilution as a Founder but there are things that can matter more.
Perceived value matters. If an investor feels like they are getting a well priced return on their investment considering the risks they feel are present they are likely to be well balanced on all the other terms.
The more investors feel like the risks haven’t been “priced fairly” they will ask for more protections which can include:
Downside protections: This can take many forms but in short it tilts the company in the favour of the investor when the company goes badly (i.e. preference on them being repaid (before founders), or interest paid to them annually).
Negative Controls: Investors, even if they don’t own the majority of the business, can ask for a list of things they have veto rights on (i.e. the ability to stop you doing certain things). These are usually geared around an investor wanting to “protect” the downside.
Tranche payments: Investors can stagger the payment to the founders for the shares in the business which is often at the option of the investor.
J: We both know the importance of profit in a business and witnessed first hand the damaging effects of the “growth at any cost” culture that took over the CPG space over the last 15 years. What should founders know?
M: Swisse Wellness was considered an overnight Australian success story, however truth be told the company had been some 40 years in the making after being founded by The Ring Family. I am blessed today to call Stephen my business partner supporting all the investments the team and I have made.
In between its humble beginnings in a warehouse in Australia in 1970s through to its $1.7bn acquisition on the Hong Kong Stock exchange the whole thing almost came crumbling down around us more than once.
The amazing management team of Swisse had developed a world leading business culture embodied by key shareholders including the Ring, Saba and Sali’s. Some of the memories working in the business will remain with me forever. The culture of the organisation was based on the premise that if you put people, principles, and passion first, then profit would follow. Cultures evolve and over time the team adopted a shortened version: “People before Profit.”
As the CFO, I had a duty to put profit first, despite my clear like for the people around me. It was and still is essential on me to explain why.
If cash is oxygen for a business, a business cannot breathe and dies and all our amazing people lose their jobs. We had exhausted cash from Investors and from banks therefore we only had one form of cash left to draw upon before our business died, that was our own cash. Everything that fed in and out of our bank account required intense scrutiny in order to save the majority of the business and jobs.
You can only make your own cash from profits, but we had nothing that we owned other than our inventory we could sell. So, the simple rules of business remained true: we needed to sell our stock for a profit to keep our people.
Three key steps to making profit are:
Know what your gross margin is
Know your target profit margin
Invest the difference between the two very carefully
You need to understand gross margin and profit margin in detail, so you can then work out what your spending allowance is. Founders need to know their numbers.
If you have amazing people you can make profit. If you have profit you can afford to keep and reward those amazing people you have. The struggle is in the juggle. Mic drop.
J: I have several articles for our readers on unit economics here and here, discussing how to build a profitable business, but I want your perspective on margins, both gross and profit.
M: Firstly, the word margin is used a lot in finance, and it’s important.
Margin in finance refers to the concept of surplus or room to play with.
For me, margin has two important uses:
· Within the business: To determine the level of room or surplus in a business.
· Outside of the business: To enable quick comparison of a business to other businesses
I personally have always tried to target a profit margin of 15%. That is for every $100 of sales I always try and make $15 profit. My room for profit is therefore $15 on every sale I make. My simple justification is that over a five year period the minimum reward I can accept for my efforts would be 10%. If I aim for 15% then during that give year period I could have up to two years where I make 0 profit I would still come out with just enough reward justifying the five years of hard work.
J: That's a good way to think about it, in terms of what your minimum reward you can accept. What other learnings can you share?
M: In times of crisis you have an urge to fight or flight. I still remember vividly a time I chose flight.
Myself and two other executives were on a call with five key executives from Proctor Gamble and Teva. It was a huge deal for us. It was 10pm at night, I was three months into the job as CFO, and running on fumes. A wave of panic descended on me as I realised I was about to be asked a question I didn’t know the answer to: “What is your gross margin?”
I hung up the call before they could ask me that question. I got out my laptop and Googled my butt off, got out Excel, panicked, and after what seemed like an eternity got the courage to dial back into the call. To be honest even after my research I was none the wiser such that panic had gripped me and my brain had stopped working. Whilst I had disappeared from the call our COO, who was strong on finance, had covered for me on what everyone assumed was a “call drop out” and explained what our target gross margin was.
Why the panic? Because I wasn’t sure EXACTLY what goes into the number. 13 years into my finance career and I was still fumbling with the definition.
You can imagine since then I have done a lot of work on this to avoid future panic.
Margin in finance refers to the concept of surplus or room to play with.
Gross Margin refers to the surplus of profit or room for profit you have after selling your product or service. The calculation refers only to the sales or expenses directly attributable to the product or service you sell.
Here's an example from our portfolio: If I sell a Brand X skin care product for $100 to David Jones but that product cost me $50 to buy from my manufacturer, I have profit or room post selling my product of $50 on that sale. My Gross Margin is $50 or can be expressed as 50% of my sale. If David Jones goes on to sell that Brand X Product for $150 to a customer on their website, David Jones also has a Gross Margin or room for profit after sale of $50. Their Gross Margin % is however $50 divided by their $150 sale which is 33%.
If this was the only sale both companies made it would be deemed that Brand X makes 50% on each and every sale it makes. David Jones makes 33%
If both companies are targeting a profit margin (i.e. room for profit post paying all expenses) of 15% then Brand X is allowed to spend 35% (i.e 50-10) of its revenue on its brand, team and infrastructure. David Jones should only spend 17%. (i.e. 33%-15%) on its brand, team and infrastructure.
People outside of the business (investors and banks) ask what your margin is because they are quickly trying to gauge you’re your room for profit. Profit post sale of your product or service. Profit post sale of your product and all other costs in your business.
They are trying to size up your business. Does your margin make sense? Is it sustainable? Is your margin improving or declining? Knowing your numbers is crucial.
J: What do you think are some fundamental money practices or learnings we should all have for “good money hygiene” in life and business?
M: Warren Buffett has said that you only see who is swimming naked when the tide goes out. Now once you stop imagining Warren naked, it is important to realise somewhere along the journey that is life, most of us have lost our way.
We live in society that encourages us to spend more than what we have and worry about the future tomorrow. We rack up debt on credit cards and we take 30 year loans from our banks to buy goods and houses we technically cannot afford. Life has the majority of us swimming naked, placing our trust in the fact that the future will be better than the past.
Businesses are the same, if not worse. Businesses take risk and get money from banks and investors to spend today in the expectation that the future will be better.
To have a good business you need to have a buffer. Something that will help you survive a rainy day. In finance this is often referred to as a strong balance sheet or having strong reserves. In essence it is a level of cash in your business that you could draw upon should shit get real.
At a minimum it’s often defined as three months’ worth of operating expenses, but more prudent businesses can keep up to 12 months coverage of expenses as their cash at bank total.
The best and most simple lesson for life and business: have a buffer.
Don't spend more than you can afford for prolonged periods - it usually ends badly.
J: So, there is so much to continue to unpack but this is already getting quite long, what shall we cover in the next few parts of this series?
M: Everything, from growing revenue (there are good and bad types of growth) to exiting your business. We’ll take the readers through everything there is to know over the next few newsletters.
I’d also love to hear from you from an operator's perspective on the speed of newness in content and product development. It feels like the consumer is being inundated with new messaging, trends and products. Is this right and sustainable? How should a brand navigate it? I’m happy to tackle the investor view, but keen to hear from you as well.
Stay tuned for part 2, coming soon.
This was so valuable for me. Thanks for sharing this with us ☺️